ASBESTOS: INHALATION OF FIBRES:
DEVELOPMENT OF MESOTHELIOMA: PUBLIC LIABILITY INSURANCE: ACCIDENTAL BODILY
INJURY OR ILLNESS OCCURRING DURING CURRENCY OF POLICY: WHEN DID ACCIDENT OCCUR:
MEANING OF ‘ACCIDENT’: LATE NOTIFICATION OF CLAIM: CONDITION PRECEDENT:
WHETHER LATE NOTIFICATION WAIVED: DOUBLE INSURANCE: BASIS OF CONTRIBUTIONSummaryThis case concerned a claim under a public
liability policy against liability for illness, injury or damage to property
occurring within the policy period. The judgment confirmed the general
understanding that, in these circumstances, the policy that responds to an
asbestos-related claim is the one in existence when an asbestos-related disease
developed, not the one in place when the exposure to asbestos fibres took place

DMC Category Rating: Confirmed

This case note is based on an Article in the July 2005
Edition of the ‘(Re)Insurance Bulletin’, published by the Reinsurance and
Insurance teams at the international firm of lawyers, DLA
Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this
website.

Background
From 1960 to 1965 Bolton Borough Council's public liability insurance was
provided by Ocean Accident and Guarantee Co Ltd, whose liabilities were
subsequently assumed by Commercial Union. From 1 February 1979 to
1 December 1991, however, its public liability insurer was Municipal
Mutual.

During the 1960s, Bolton carried out demolition and building
works at various sites. Its practice was to engage a number of companies and
firms to do the work under its overall control. One such firm employed Gordon
Green. During the course of this employment, Mr Green worked at sites where, due
to Bolton's negligence, he was exposed to asbestos fibres. Later in his working
life he was further exposed to asbestos while employed by another company. In
November 1991, he died of mesothelioma. His widow started an action against
Bolton and the other employer and they settled the claim on the basis that each
paid half the compensation.

Bolton sought to recover under its public liability insurance
with Municipal Mutual (the insurer at the time Mr Green was diagnosed).
Municipal Mutual, however, said it was not liable for circumstances that arose
outside the policy period. The occurrence in this case was the exposure to
asbestos in the 1960s, years before it was on risk.

Bolton then joined Commercial Union to the action, since Ocean
was the insurer at the time of the exposure and Commercial Union had taken over
Ocean's liabilities. Commercial Union, however, also denied liability, saying
the exposure did not fall within the terms of the cover, and, in the
alternative, claiming there had been a breach of a notification clause.

The Municipal Mutual policy
Municipal Mutualagreed to indemnify the insured in respect of "sums
the Insured shall become legally liable to pay as compensation arising out of:

(a) accidental bodily injury or illness (fatal or otherwise)
to any person other than any person employed under a contract of service…with
the Insured if such injury or illness arises out of and in the course of the
employment

b) accidental loss of or accidental damage caused to property, when such injury illness
loss or damage occurs during the
currency of the Policy and arises out of the exercise of the functions of the
Local Authority".

Under the general policy conditions, it provided:

"If at the time of an occurrence giving rise to a claim
under this Policy there is or would but for the existence of this Policy be
any other insurance applicable to such claim then unless the Policy
expressly provides otherwise the Company shall not be liable in respect of
that claim except insofar as concerns any excess beyond the amount which
would be payable under such other insurance had this Policy not been in
force".

The Ocean policy
The Ocean policy provided an indemnity against legal liability to pay
compensation in respect of:

(1) bodily injury to or illness of any person
(2) loss of or damage to property

occurring within Great Britain…during the period of
indemnity as a result of an accident and happening or caused as described in
the Schedule under the heading of Description of Risk".

The notification clause provided:

"The Insured shall give written notice to the Head
Office or Branch Office of the Company of any accident or claim or
proceedings immediately the same shall have come to the knowledge of the
Insured or his representatives."

Condition 10 was a general "sweep-up" clause:

"The due observance and fulfilment of the terms
provisions conditions and endorsements of this Policy by the Insured insofar
as they relate to anything to be done or complied with by him… shall be
conditions precedent to any liability of the Company to make any payment
under this Policy."

Accidental injury
Detailed medical evidence showed that, when asbestos fibres are inhaled, the
body’s defence mechanisms are immediately brought into play. These cause
microscopic changes in the cells, but nothing that could be called an injury,
and many of the potentially harmful fibres are expelled from the body naturally.
The development of mesothelioma does not begin for many years. It cannot be
predicted if, or when, a malignancy will develop in a particular individual, but
the chances of its happening are greatly increased by the presence of asbestos
fibres.

So far as Mr Green was concerned, until the onset of the disease
in about 1980, he did not have mesothelioma and it was not inevitable that he
would develop mesothelioma, although the risk of him doing so was high.

Bolton argued that it had come under a legal liability to
Mr Green, not when he inhaled asbestos while working on their site (because
he did not sustain an injury or illness then), but when a cell became malignant
in or about 1980, during the currency of the Municipal Mutual policy.

Municipal Mutual, however, maintained that it was the
expectation of the parties that a public liability policy would provide
indemnity in respect of negligent acts and omissions occurring during the
currency of the policy. The negligent act in this case happened in 1965 or
earlier. The words "arising out of the functions of a Local Authority"
in the policy should be construed as if qualified by "during the same
currency of the Policy".

In addition, "injury" should be construed as
"insult or injury". In a medical sense, the inhalation of
asbestos fibres was an insult to the body, albeit not an injury. The only time
there had been an accidental insult was when fibres were allowed to enter. The
stage between inhalation and development of the disease was not an accident, but
the inevitable (or at least unalterable) workings of the human body.

Judgment
The judge disagreed. In ordinary language, "bodily injury or illness"
did not include the inhalation of fibres, which, though potentially harmful,
might or might not develop into a malignancy. There was no need to introduce an
alternative "insult".

Under this policy wording, the bodily injury, illness, loss of
or damage to property had to have occurred during the currency of the policy.
The word "accidental" merely meant unintended. It was no less
accidental that, because fibres had been inhaled, injury was a direct
consequence. Mr Green became fatally ill in or about 1980. This meant that
Municipal Mutual was liable to indemnify Bolton against its liability to Mr
Green's widow.

The Commercial Union claim
It followed that there was no liability under the Ocean policy because the
effect of the wording was broadly similar and Mr Green did not suffer a bodily
injury or illness during the period of indemnity.

This rendered it unnecessary to look at questions of late
notification and contribution, but the judge considered them briefly,
nevertheless. Bolton was first informed of the claim in February 1994 but did
not notify Commercial Union until October 1997. Commercial Union then became
sidetracked into considerations of whether the delay had caused it prejudice. In
the end, however, it relied on the coverage point and denied liability on the
grounds that the injury occurred outside its policy period. The defence of late
notification was not raised again until the proceedings.

Had the claim been covered by the policy, the judge appeared to
accept that there had been a breach of a condition precedent, which meant that
Commercial Union had a contractual right to refuse indemnity. The next question
was whether there had been a waiver of that right.

Waiver
A waiver can only arise if the insurer knows of the facts giving rise to the
right it is choosing to forego. The evidence here was that Commercial Union was
considering late notification in 1997 (as Bolton was aware) but chose to rely on
the coverage point. This conduct was enough to convey to a reasonable insured
that Commercial Union was electing not to exercise the right to refuse indemnity
for late notification.

But in choosing to rely on one defence rather than the other,
the judge concluded Commercial Union had not been faced with two courses that
were so inconsistent that choosing one automatically waived its right to rely on
the other. It was not choosing between repudiating and affirming the policy, it
merely left late notification "in the air" and gave policy
cover as the reason for refusing indemnity. On this basis, the judge found there
had not been a waiver.

Double insurance and contribution
If Commercial Union could rely on breach of condition precedent, how did this
affect any contribution claim Municipal Mutual might have?

In Legal and General Assurance Society Ltd v Drake Insurance
Company Ltd [1992] QB 887, the Court of Appeal looked at the issue of a
motorist insured by two insurers. If the motorist negligently injured a
pedestrian and one of the insurers paid out under its policy, that insurer could
force the other insurer to contribute. The right of contribution was based, not
on contract, but on the principle of equity that the burden should be shared
equally.

This meant that, if the second insurer was not notified of the
claim in breach of a condition precedent, the first insurer would still be
entitled to claim a contribution. The equitable principle did not rely on the
contractual liability of the second insurer to the motorist, but on the fact
that both insurers had taken premiums in respect of the same risk, and only one
had paid.

That decision was binding on this case. If there had been double
insurance and Commercial Union had a notification defence, Municipal Mutual
would still have been entitled to claim a contribution.

But this was not double insurance. Double insurance means
insurance by two insurers in respect of the same risk at the same time.
Municipal Mutual and Commercial Union were successive insurers, insuring Bolton
in respect of different risks. Only Municipal Mutual insured Bolton against its
liability to Mr Green for an injury that commenced in about 1980. Consequently,
there could be no contribution claim against Commercial Union.

Comment
This case provides useful confirmation that it is the public liability
policy in place when the disease is contracted that responds to the claim.

But the judge's conclusion on the late notification point is a
little difficult to follow. First of all, it is not necessarily the case that
this was an effective condition precedent. The notification clause was not
expressed as such, and the court is becoming increasingly wary of the sort of
general "sweep-up" provision in clause 10, which makes no distinction
between different conditions but merely makes them all conditions precedent. If
this was not a condition precedent then, as recently confirmed by the Court of
Appeal in Sirius International Insurance v Friends Provident Life &
Pensions Ltd[2005] EWCA Civ 601, the only remedy would have been
damages, provided Commercial Union had suffered a quantifiable loss as a result.

Secondly, in order to establish waiver, the insurer must know of
the fact of the breach and of its legal rights and either make an express choice
or act unequivocally in such a way as would lead a reasonable person to believe
that it is not going to insist upon those rights. If, as the judge found,
Commercial Union was considering late notification from the start and its
actions were enough to convey to a reasonable insured that it would not rely on
that defence, it is difficult to see that there was not a waiver.

These points are, however, purely of academic interest, since
the Ocean policy did not cover the injury in question.

These Case Notes have been prepared
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that they contain every pertinent point. Reliance should not therefore be placed
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